Another Way SaaS Changes Everything

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There are a lot of “new rules” in enterprise software sales. We discussed many of them in depth at a recent industry forum: it’s now a buying process and not a selling process, the steak dinner and golf game are out, the length of the sales cycle has shortened, and so on. Many of the new rules can be traced to the shift to the cloud. With much quicker proofs of concept and shorter implementation times, enterprises can realize software’s value (or lack thereof) much faster and with less pain.

Even Microsoft, provider of the most widely used on-premise software suite, has made a huge push in recent years around cloud-based Office 365. Senior sales folks at Microsoft tell me that 75 percent of their accounts are now buying varying amounts of their cloud services. Like other vendors, Microsoft realized that the IT managers of today and tomorrow are increasingly partial to implementing SaaS-based (Software as a Service) resources, rather than installing and maintaining on-premise applications.

But with the growing acceptance of the cloud, SaaS-based vendors face different hurdles in their efforts to grow. One major change has to do with what defines a sales win—it’s not enough for a customer to sign on the dotted line. In the shelfware days, enterprise software vendors could sell a 1,000-seat annual license and get paid—whether the customer used the product or not. The software could collect dust if the customer decided not to use it or found a better option. Even so, the sale was final.

That’s not how it works with SaaS-based products. The sale is just beginning when a customer signs; vendors get paid when the software is in deployment and people are using it regularly. For SaaS vendors, it’s not about making sales; it’s about driving usage within customer organizations—determining the key stakeholders in senior positions who can drive staff adoption, training them in how to use the product, and exciting them enough to become advocates of the service. This is the new, multi-step path to revenue growth for software companies.

How do you go from signed account to a fully ramped, referenceable, and productive customer? This is a huge piece of the puzzle to solve. A typical vendor has a salesperson focused on customer acquisition, but once the initial sale is “closed,” he or she moves onto another prospect. What then? Who takes over the account? Do you have good training support? How are you ensuring increased usage? How are you incorporating feedback into your latest iterations?

Constant Contact, an early provider of cloud-based e-mail marketing services, uses multiple methods to ensure new customers are onboarded, well-trained, and supported, and demonstrating steady usage—which, of course, it can measure easily as an online service (vs. on-premise software).

Our portfolio company HubCast is another good example. A cloud print services provider, HubCast not only saves its customers tremendous amounts of money, hassle, and time, it delivers better service and flexibility to end users. HubCast can track the amount of usage closely and make sure customers are receiving industry-leading quality across its partner network. While business line leaders drive the purchase, it is often the lower-level staff who must use—and become vocal advocates of—the service, in order to drive expansion opportunities within large accounts.

Still, this is a difficult road to navigate for most SaaS vendors. And because it takes longer to recoup customers’ cost of acquisition—and payments are spread out over multiple years—many of these companies seek venture capital. The ones we identify as promising growth opportunities have low total customer acquisition cost, impressive contribution margins, and tremendous scale potential, but in the end, success for these companies depends on driving repeated use among their customers and creating product advocates.

This is enterprise sales in 2013—a new game with new rules, and the importance of demonstrating value is greater than ever.

Matt Fates is a partner at Ascent Venture Partners and over the last decade has focused on investments in data analytics and cloud business services. Follow @AscentVP

3 responses to “Another Way SaaS Changes Everything”

Good piece, Matt. This is not a new problem for many kinds of sales organizations however. As one example, for the last 20 or more years, phone companies have prospered only by driving usage, made harder for them by new competitors (cable and wireless). Look at financial services as another example. This does require much more sophisticated sales people who are capable of organizing programs to drive volume, sustain relationships, identify new applications etc. Most sales people and leaders in early stage tech companies don’t have those skills, or even realize that they need them.

There is another overlook aspect to sales that SaaS magnifies, and that is matching the product to the specific needs of the company. As you pointed out, even if on premises software sits on the shelf, the vendor is paid. However, because SaaS, is bought annually or monthly, it is much easier for a customer to dump a product that doesn’t work. Conversely, if the product is a good match for the specific needs, usage often grows over time.

The challenge is to define requirements, measure how closely those requirements are met, and then buy the best fitting product. This is a win for both the customer and the vendor: The customer gets software that solves a real problem, and the vendor gets a client who is delighted with their product. It also means the vendor does not waste time with customers where there is a poor fit with the requirements. While I was in IT management, this was a constant problem, and it eventually led me to found Wayferry, a company that does decision support for software selection.

There is one other aspect to SaaS that people sometimes do not appreciate. Customers can often afford to purchase more high-end software as SaaS that they would if they bought software the old way. The reason is that with SaaS setup fees are often relatively low, and it is licensed per seat. Conventional software is often far more expensive with installation and the server components, even if the per users prices are similar. Thus higher end vendors can enjoy more sales with the SaaS model that they would otherwise get with the on premises model.